Der Spiegel SPIEGEL alert
has an article in english regarding a new plan to coordinate EU economies, reminiscent of Wolfgang Schäuble's two-speed Europe proposal years ago.

She was interested in a productive atmosphere for talks because she wanted to win over Barroso for a far greater plan. It is a plan that has evolved slowly -- Merkel had to warm up to the idea herself -- and she knows that it won't appeal to the head of the Commission. Dubbed the "pact for competitiveness," the plan that Merkel has in mind could permanently change the structure of the European Union.

The idea, which the chancellor conveyed to her guest in English, calls for closer cooperation among the member states of the euro zone. It would entail more closely harmonizing their financial, economic and social policies. Merkel hopes that this would prevent the economies of the euro countries from diverging as much as they have over the past few years. If fully adopted, it would take European cooperation to a whole new level.
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But now she intends to fundamentally change things. With her plan, the chancellor wants to do more than just go on the offensive politically. She has also set out to rectify the weakness that the former long-serving Commission President Jacques Delors considers a basic "design flaw" in the monetary union: Although there is a common currency in Europe, there is no corresponding common economic policy.

The Merkel pact aims to remedy this shortcoming, at least in part. According to the plan, the euro-zone countries would coordinate their economic policies far more closely in the future, thus playing a leadership role within the entire EU. What Merkel has in mind is essentially nothing other than the "two-speed Europe" that her finance minister, Wolfgang Schäuble, similarly proposed many years ago.

The "plan has been developed in secret, and is to be presented to the EU summit leaders on Friday. It was presented to Barroso last Tuesday. Thought this should have it's own diary for discussion, since it echoes themes already under discussion here.

frontpaged - Nomad

The Devil is likely once again in the details, but on the surface one can at least credit her for bringing up the subject. OTOH, the track record of recent EU economic policies leads one to suspect there's huge potential for a hidden shock doctrine policy to be foisted upon us all.

Her plan is ready, but there is still discussion about how to make it reality. Barroso told Merkel during last week's meeting in Meseberg that the European Commission wants to direct the process. Merkel, on the other hand, claims this role for herself and the other heads of state and government. There was reportedly a heated discussion concerning this point. "I will not allow the European Commission to be sidelined," Barroso told his aides afterwards. At least Merkel assured him in Meseberg that the Commission would oversee progress toward the plan's goals in the individual countries. She also said that he could attend meetings when the leaders of the euro-zone countries convene in the future.

What exactly is peering out between the lines?

In order to achieve these objectives as quickly as possible, Merkel is seeking support for an immediate program "that will be implemented on the national level within 12 months" (see graphic). This would entail the member countries adapting "the retirement age to demographic trends" and introducing financial policy rules that are modeled after Germany's so-called debt brake (an amendment to Germany's constitution that requires the government to virtually eliminate the structural deficit by 2016). Furthermore, within one year the countries would have to mutually recognize each other's educational and professional qualifications, as well as introducing a standardized means of assessing corporate tax to avoid so-called tax dumping (i.e. when countries try to attract companies by having an artificially low tax rate).

Let's forget for a moment that she brings up the "retirement" issue. Still, the standardized tax words in a manner of progressive framing would be a direction I might be able to swallow. Are we seeing a semblance of sanity here, or do i simply misunderstand what's happening?

Apparently, Der Spiegel has been reading Migeru.

Nothing demonstrates this as clearly as the Stability and Growth Pact, which the EU countries agreed to in the mid-1990s. The agreement was designed to ensure that national governments did not amass too many debts. But when Berlin and Paris violated the deficit criteria in 2003, they did not submit to the agreed-upon sanctions. Instead, the two most powerful countries in the EU managed to have the Stability Pact suspended. Thanks to their efforts, it was subsequently watered down.

Ahhh, here's the rub.

But this alone is not enough to effectively stabilize the euro, at least according to Merkel's analysis of the situation. There is also a need for coordinated tax, wage and social policies that the national states must agree to.

Then i end up finding myself in agreement with the head of Deutsche Bank, which is certainly a signal of trouble for my poor brain.

FDP euroskeptics are also under pressure because German industry supports the Merkel plan. "There is no question that we need closer cooperation in the economic sector," says Deutsche Bank CEO Josef Ackermann. "Everything that leads to better coordination makes sense," says Paul Achleitner, who is chief financial officer at the insurance giant Allianz, while Nikolaus von Bomhard, CEO of leading reinsurance company Munich Re, argues that one shouldn't allow oneself to be deterred by "shock words" like economic government.

Did all this happen under the radar (or have we already discussed this plan)? I'll leave it to the progressive pundits here figure out what all this means. For sure it's interesting to try and project where this could go.

I haven't had a chance to digest the upshot or potential represented in the article, but I did figure we could have a go at it. On the surface, there are significant changes under discussion behind the EU scenes. Enjoy.

This would entail the member countries adapting "the retirement age to demographic trends" and introducing financial policy rules that are modeled after Germany's so-called debt brake (an amendment to Germany's constitution that requires the government to virtually eliminate the structural deficit by 2016).

So increased retirement age (because that is what it means) and an end to structural increases of private wealth (if I understand modern monetary theory right). Sounds bonkers to me.

Add a process where the only institution directly elected for the purpose of being a European institution - the parliament - appears completely sidetracked, and the economic government of Europe will be run solely in accordance to the will of those able to buy the most expensive lobbyists.

European integration might be a good thing, but just because it is European or it is integration doesn't mean it's not being designed and implemented by conservatives who are bonkers.

This is going on 20 years of bonkers European policy, and as long as these idiots are in control I'll continue to oppose further "core"-led European integration.

The Green Left was right to oppose Lisbon, and there is no longer any credible claim that the EU isn't a neoliberal project.

When we have wrested the European rudder from the conservatives and neoliberals we can go back to debating whether the EU is necessarily a neoliberal project or should be continued. But, as it is now, paralysis works for me as it has since the Nice summit of December 2002.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

This would entail the member countries adapting "the retirement age to demographic trends" and introducing financial policy rules that are modeled after Germany's so-called debt brake (an amendment to Germany's constitution that requires the government to virtually eliminate the structural deficit by 2016).

Looking for contrarian German opinion in EuroIntelligence.com, one finds:

We are not surprised that Germany is framing the post-bailout debate purely in terms of fiscal discipline. The FT has a story that Germany wants to force its balanced budget constitutional amendment onto the rest of the euro area. Germany's law, which comes into effect in 2016 restricts the deficit-to-GDP ratio to 0.35%, which should stabilise the debt to GDP ratio at a ridiculously low level of between 10 and 20%. The report says Sarkozy is also favouring some constitutional deficit ceiling, details of which are expected to be revealed by former IMF MD Michel Camdessu this week.

Angela Merkel's new strategy seems to be to accept the need for an economic government of the eurozone, but to ensure that it deals mostly with macroeconomically irrelevant issues. Der Spiegel has some concrete details of what Merkel actually means by a common economic government. It turns out the big idea is the harmonisation of the pension age (something not really necessary given that pensions systems remain nationally funded, and very different in structure.) Merkel also wants the rest of the eurozone to adopt Germany's version of a debt-brake, a self imposed balance budget rule. In other words, economic government means forcing the rest of the eurozone to adopt Germany's economic and social policies. (Since this is not going to happen, one wonders what the purpose of this proposal might be. None of this would have prevented the crisis had this been in place ten years ago. None of this will get us out of the crisis. One still gets the impression that Berlin is pussyfooting on crisis resolution.)

Wolfgang Münchau and friends may be German economists, but they're not amused.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

The most amazing and disheartening thing about the crisis that started in 2007 is that at every turn the ideologies responsible for the crisis have come out reinforced.

In Europe, parties advocating deregulation and neoliberal economics have won the elections had since the crisis started, and the macroeconomic arrangements that sustain the internal trade imbalances within the Eurozone are not going to be reformed but strengthened.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

The problem is that dialogues naturally proceed by first critiquing the existing dominant discourse. There has been a significant degree of deconstruction accomplished for NCE on ET, but, while specific policy alternatives have been proposed, there has not yet emerged, to my knowledge, a coherent, comprehensive alternative approach to the social organization of productive activity that we currently have. That lack includes the production and dissemination of a compelling counter-narrative. Meanwhile, the looters can rely on the existing language to blind the vast majority of the people from seeing what is happening and to convince them that there is no alternative. It does not help that those who benefit from the current NCE nonsense have control of most of the states, international organizations and media.

What we need is a vision of how our societies can be organized so as to serve the needs of all of the citizens and not just the needs of rapacious elites. Then we need a narrative of how we can get from here to there. These needs are going to be particularly on display in Tunisia and Egypt over the next year.

What we need is new Declaration of Independence that is inclusive of the means of organization of society and production in a democratic manner. It needs to proceed by asserting self evident truths, as did Jefferson's work. Half a century ago Tom Hayden noted that the least democratic place in our lives was the work place. Instead of overthrowing the rule of monarchs we now need to overthrow the rule of grasping financial elites who are and will continue to suck dry the societies in which they operate leaving very little for any but themselves.

The challenge we face is that it has always been easier to replace one autocracy with another, one totalitarianism with another. The problem is that this has been shown to be destructive of the society and the environment. Scott Adams parodied this with the Elbonians, who sold off the mud that covered their country at a profit to The West for mud baths and were so successful at that project that they removed crust down to the magma and had to leave. The challenge is to create a system that protects the interests of the average citizen in an environment where so many of these citizens have been recruited to be agents of their own destruction and instruments of their own oppression.

But I'd like to draw your attention to a proposal from Marco Annunziata, the chief European economist at UniCredit, the Italian bank. He suggests that fiscal responsibility should be "hard-coded into each country's legislation in the form of automatic, binding and unchangeable rules". He cites the example of Poland, whose constitution sets a ceiling for public debt of 60 per cent of gross domestic product. He could also have mentioned Germany, which adopted a constitutional amendment last year that will restrict budget deficits to 0.35 per cent of GDP from 2016 onwards.

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It is an intriguing proposal, not far removed from what is already under discussion in German policymaking circles. I see one or two difficulties with it. One, as Annunziata himself points out, is that a government nearing the end of its term in office may push up spending with the aim of winning an election and - if it loses - leaving the subsequent, constitutionally decreed belt-tightening to its successor. This is a recipe for bitter political conflict.

My second reservation is that constitutions are not, in my view, an appropriate place for eternal rules about economic policy. Constitutions lay down principles of government. They establish whether a country is a monarchy or a republic, a presidential system or a parliamentary system or a mixture of the two. They guarantee inalienable human rights. But they should not set out detailed formulae for economic policy, because no one can possibly know what economic circumstances will arise in the years after the constitution was written.

A decision was taken recently in Berlin to introduce a balanced-budget law in the German constitution. It was a hugely important decision. It may not have received due attention outside Germany given the flood of other economic and financial news. From 2016, it will be illegal for the federal government to run a deficit of more than 0.35 per cent of gross domestic product. From 2020, the federal states will not be allowed to run any deficit at all. Unlike Europe's stability and growth pact, which was first circumvented, later softened and then ignored, this unilateral constitutional law will stick. I would expect that for the next 20 or 30 years, deficit reduction will be the first, second and third priority of German economic policy.

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I can foresee two outcomes. First, Germany might end up in a procyclical downward spiral of debt reduction and low growth. In that case, the constitutionally prescribed pursuit of a balanced budget would require ever greater budgetary cuts to compensate for a loss of tax revenues.

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Either of those scenarios, even the positive one, is going to be hugely damaging to the eurozone. In the first case, the German economy would become a structural basket case, and would drag down the rest of Europe for a generation. In the second case, economic and political tensions inside the eurozone are going to become unbearable. Over the past 25 years, France has more or less followed Germany's lead at every turn, but I suspect this may be a turn too far. Deficit reduction has not been, nor will it be, a priority for Nicolas Sarkozy, the French president. On the contrary: he has listened to bad advice from French economists who told him that budget deficits are irrelevant, and that he should focus only on structural reforms. Budget deficits and debt levels matter in a monetary union. But a zero level of debt is neither necessary nor desirable.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

OTOH, Münchau also drafted a rosy scenario, which happened to come about (at the expense of what Euro partners?).

I simply cannot see how Germany can produce robust growth in such an environment, not even in 2011. If that scenario prevails - as I believe it will - the new constitutional law will produce a pro-cyclical fiscal policy with immediate effect.

One could also construct a virtuous cycle - the second outcome. If Germany were to return to a pre-crisis level of growth in 2011, and all is well after that, the consolidation phase would then start in a cyclical upturn.

Assuming the figures on Schland's economy are accurate, 2010 was actually one of marked success compared to 2009 predictions, and the prognosis for 2011 is for more of the same. If that's true, what did Münchau miss?

Assuming the figures on Schland's economy are accurate, 2010 was actually one of marked success compared to 2009 predictions

Compared to predictions, maybe. It's also the result of fiscal stimulus in 2009.

However, even if the figures are accurate we're talking about modest figures being touted as "sensational":

The German federal Government raised its growth forecast for te current year from 1.8% to 2.3%. At the presentation of the yearly economic report the economy minister Rainer Brüderle (FDP) said Germany has come out of the crisis best among European countries, with "sensational figures". "We're going forth in seven-league boots, while the others trot behind us in single file".

If growth is up despite exports going down, and with disposable income going up, it means we're going some way towards correcting the Eurozone imbalances with more domestic consumption in Germany. But already the ECB is fretting about inflation, Germany is complaining about labour shortages (at 7% unemployment? Is that "the new full employment level" in Germany?) and so on. It won't be allowed to last.

I predict, in any case, that the 2010 austerity will produce a slump in 2011 just like the 2009 stimulus produced excess growth in 2010. See you in a year.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

Given Ireland's Debt GDP ration was c. 25% in 2007 with a budget surplus and positive balance of payments etc., presumably the Irish economy of 2007 is what all should seek to emulate - by constitutional coercion if necessary...

Apparently the reports here in Greece indicate that part of the expected "constitutional reforms" include the removal of all or most constitutional protection of collective bargaining agreements. In fact we're well on the way of dismantling most labor protection laws (in the name of "competitiveness") in the feverent hope that wages will further fall to sub-poverty levels (the troika apparently seems to think that 700 Euros/month (below poverty levels even before the crisis) is excessive in a country with raging inflation. I need to write a diary about all this, as a warning, because we seem to be the guinea pig for the thirdworldization plan for most of the EU periphery....

Germany could present the proposals, which are in draft form and may change further in the coming days, to its euro zone partners at a summit on Friday.

Berlin wants them to form part of a comprehensive anti-crisis package for the euro zone that is expected to be unveiled at another EU summit in March, although the details would only be pinned down over the next 12 months.

Belgium, Cyprus, Luxembourg and Malta all use indexation to set some domestic wages while others including Portugal relate salaries to price growth through collective bargaining agreements and negotiations.

Interestingly, in the context of debt deflation theories of recessions, Hyman Minsky actually claimed that inflation indexing is generally a bad idea. I will find the quotes and post them tonight.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman